U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period ended
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Commission File Number 0-22787
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FOUR OAKS FINCORP, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-2028446
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
6114 U.S. 301 SOUTH, FOUR OAKS, NC 27524
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(Address of principal executive office, including zip code)
(919) 963-2177
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, 2,719,811
par value $1.00 per share (Number of shares outstanding
(Title of Class) as of May 11, 2004)
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Page No.
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Part I. FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003.......................... 3
Consolidated Statements of Income
Three Months Ended March 31, 2004 and 2003.................... 4
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2004 and 2003.................... 5
Consolidated Statement of Shareholders' Equity
Three Months Ended March 31, 2004............................. 6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2004 and 2003.................... 7
Notes to Consolidated Financial Statements.................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 10
Item 3 - Quantitative and Qualitative Disclosure About Market Risk...... 12
Item 4 - Controls and Procedures ....................................... 13
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K............................... 13
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Part I. Financial Information
Item 1 - Financial Statements
FOUR OAKS FINCORP, INC.
CONSOLIDATED BALANCE SHEETS
===================================================================================================================
March 31, 2004 December 31,
(Unaudited) 2003*
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ASSETS (In thousands)
Cash and due from banks $ 11,384 $ 10,548
Interest-earning deposits 5,332 5,277
Investment securities available for sale 44,505 38,203
Loans 289,980 272,623
Allowance for loan losses (3,865) (3,430)
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Net loans 286,115 269,193
Accrued interest receivable 1,741 1,893
Bank premises and equipment, net 10,413 10,582
FHLB stock 2,150 1,923
Other assets 4,813 4,102
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Total assets $ 366,453 $ 341,721
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LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 52,999 $ 50,829
Money market and NOW accounts 51,632 43,927
Savings 13,455 13,038
Time deposits, $100,000 and over 89,311 85,100
Other time deposits 77,927 80,024
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Total deposits 285,324 272,918
Borrowings 43,161 33,160
Accrued interest payable 1,299 1,284
Other liabilities 2,173 1,479
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Total liabilities 331,957 308,841
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Shareholders' equity:
Common stock; $1.00 par value, 5,000,000 shares
authorized; 2,713,424 and 2,676,263 shares issued and
outstanding at March 31, 2004 and December 31, 2003,
respectively 2,713 2,676
Additional paid-in capital 8,677 8,029
Retained earnings 22,395 21,867
Accumulated other comprehensive income 711 308
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Total shareholders' equity 34,496 32,880
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Total liabilities and shareholders' equity $ 366,453 $ 341,721
================== =================
* Derived from audited consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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Three Months Ended
March 31,
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2004 2003
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(In thousands, except
per share data)
Interest income:
Loans, including fees $ 4,640 $ 4,031
Investment securities:
Taxable 300 427
Tax-exempt 51 55
Dividends 22 25
Interest-earning deposits 5 21
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Total interest income 5,018 4,559
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Interest expense:
Deposits 942 1,274
Borrowings 396 381
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Total interest expense 1,338 1,655
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Net interest income 3,680 2,904
Provision for loan losses 568 343
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Net interest income after
provision for loan losses 3,112 2,561
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Non-interest income:
Service charges on deposit accounts 496 443
Other service charges, commissions and fees 307 308
Gain on sale of investment securities available for sale 56 165
Increase in cash surrender value of life insurance 49 -
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Total non-interest income 908 916
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Non-interest expense:
Salaries 1,323 1,165
Employee benefits 293 273
Occupancy expenses 135 110
Equipment expenses 276 283
Professional and consulting fees 152 171
Other taxes and licenses 62 60
Merchant fees 65 68
Other operating expenses 484 416
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Total non-interest expense 2,790 2,546
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Income before income taxes 1,230 931
Income taxes 431 303
Net income $ 799 $ 628
============ ============
Net income per common share:
Basic and diluted $ .30 $ .23
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The accompanying notes are an integral part of the consolidated financial statements.
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Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income (UNAUDITED)
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Three Months Ended
March 31,
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2004 2003
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(Amounts in thousands)
Net income $ 799 $ 628
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Other comprehensive income:
Securities available for sale:
Unrealized holding gains on available for sale securities 371 280
Tax effect (147) (114)
Reclassification of gains recognized in net income (56) (165)
Tax effect 22 66
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Net of tax amount 190 67
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Cash flow hedging activities:
Unrealized holding gains on cash flow hedging activities 353 -
Tax effect (140) -
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Net of tax amount 213 -
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Total other comprehensive income 403 67
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Comprehensive income $ 1,202 $ 695
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The accompanying notes are an integral part of the consolidated financial statements.
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Four Oaks Fincorp, Inc.
Consolidated Statement of Shareholders' Equity (unaudited)
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Accumulated
Common stock Additional other Total
---------------------- paid-in Retained comprehensive shareholders'
Shares Amount capital earnings income equity
--------- ----------- ----------- ------------ ------------- -------------
(Amounts in thousands, except share and per share data)
Balance, December 31, 2003 2,676,263 $ 2,676 $ 8,029 $ 21,867 $ 308 $ 32,880
Comprehensive income:
Net income - - - 799 - 799
Other comprehensive income - - - - 403 403
Common stock issued pursuant to:
Exercise of stock options 37,161 37 609 - - 646
Current income tax benefit - - 39 - - 39
Cash dividends of $.10 per share - - - (271) - (271)
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Balance, March 31, 2004 2,713,424 $ 2,713 $ 8,677 $ 22,395 $ 711 $ 34,496
========= =========== =========== ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended
March 31,
----------------------------
2004 2003
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(In thousands)
Operating activities:
Net income $ 799 $ 628
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 568 343
Provision for depreciation and amortization 251 219
Net amortization of bond premiums and discounts 51 160
Gain on sale of securities (56) (165)
Gain on sale of foreclosed assets - (4)
Increase in cash surrender value of life insurance (49) -
Changes in assets and liabilities:
Increase in other assets (295) (391)
Decrease in interest receivable 152 152
Increase (decrease) in other liabilities 643 (526)
Increase (decrease) in interest payable 15 (252)
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Net cash provided by operating activities 2,079 164
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Investing activities:
Proceeds from sales and calls of securities available for sale 11,147 21,393
Proceeds from maturities of securities available for sale 2,826 -
Purchase of securities available for sale (19,955) (14,049)
Net increase in loans (17,773) (7,550)
Purchase of bank premises and equipment (78) (341)
Purchase of Federal Home Loan Bank stock (227) -
Proceeds from sales of foreclosed assets - 248
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Net cash used in investment activities (24,060) (299)
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Financing activities:
Net proceeds from borrowings 10,001 995
Net increase in deposit accounts 12,496 4,841
Proceeds from issuance of common stock 646 419
Purchase and retirement of common stock - (270)
Cash dividends (271) (237)
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Net cash provided by financing activities 22,872 5,748
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Increase in cash and cash equivalents 891 5,613
Cash and cash equivalents at beginning of period 15,825 19,054
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Cash and cash equivalents at end of period $ 16,716 $ 24,667
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 1 - BASIS OF PRESENTATION
In management's opinion, the financial information contained in the
accompanying consolidated financial statements, which is unaudited, reflects all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of the financial information as of and for the three month
periods ended March 31, 2004 and 2003, in conformity with accounting principles
generally accepted in the United States of America. The consolidated financial
statements include the accounts of Four Oaks Fincorp, Inc. (the "Company") and
its wholly-owned subsidiaries, Four Oaks Bank & Trust Company (the "Bank"), and
Four Oaks Mortgage Services, LLC, a mortgage origination subsidiary. All
significant intercompany transactions and balances have been eliminated in
consolidation. Operating results for the three month period ended March 31, 2004
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2004.
The organization and business of the Company, accounting policies followed
by the Company and other information are contained in the notes to the
consolidated financial statements filed as part of the Company's annual report
on Form 10-KSB for the year ended December 31, 2003. This quarterly report
should be read in conjunction with such annual report.
NOTE 2 - NET INCOME PER SHARE
Basic and diluted net income per common share is computed based on the
weighted average number of shares outstanding during each period after
retroactively adjusting for a 5-for-4 stock split paid on November 10, 2003.
Diluted net income per common share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
would then share in the net income of the Company.
Basic and diluted net income per common share have been computed based upon
net income as presented in the accompanying consolidated statements of income
divided by the weighted average number of common shares outstanding or assumed
to be outstanding as summarized below:
Three Months Ended
March 31,
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2004 2003
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Weighted average number of common shares
used in computing basic net income per share 2,693,293 2,682,703
Effect of dilutive stock options 13,584 6,961
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Weighted average number of common shares
and dilutive potential common shares used
in computing diluted net income per share 2,706,877 2,689,664
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FOUR OAKS FINCORP, INC.
Notes to Consolidated Financial Statements
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NOTE 3 - STOCK COMPENSATION PLANS
SFAS No. 123, Accounting for Stock-Based Compensation, encourages all entities
to adopt a fair value based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Company's stock option plans have no
intrinsic value at the grant date as they are granted with an exercise price
equal to the fair market value on that date and, under Opinion No. 25, no
compensation cost is recognized for them. The Company has elected to continue
with the accounting methodology in Opinion No. 25 and, as a result, has provided
the following pro forma disclosures of net income and earnings per share and
other disclosures as if the fair value based method of accounting had been
applied.
Three Months Ended
March 31,
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2004 2003
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(Amounts in thousands,
except per share data)
Net income:
As reported $ 799 $ 628
Deduct:Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects (15) (14)
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Pro forma $ 784 $ 614
========= ========
Basic earnings per share:
As reported $ .30 $ .23
Pro forma .29 .23
Diluted earnings per share:
As reported $ .30 $ .23
Pro forma .29 .23
NOTE 4 - COMMITMENTS
At March 31, 2004, loan commitments were as follows (in thousands):
Commitment to extend credit $ 52,940
Undisbursed lines of credit 20,026
Letters of credit 1,238
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides information about the major components of the
financial condition and results of operations of the Company and its
subsidiaries and should be read in conjunction with our Consolidated Financial
Statements and Notes thereto.
Comparison of Financial Condition at
March 31, 2004 and December 31, 2003
During the three months ended March 31, 2004, the Company's total assets grew
from $341.7 million at December 31, 2003 to $366.5 million, an increase of $24.8
million or 7.25%. This increase in our assets resulted primarily from the
increase in our net loans of $16.9 million from $269.2 million at December 31,
2003 to $286.1 million at March 31, 2004. The growth in our loan portfolio
resulted primarily from increases in our loans secured by real estate, which
increased $17.9 million. In addition, our liquid assets, consisting of cash and
cash equivalents and investment securities available for sale, experienced a net
increase of $6.6 million. This growth in our assets was funded by increases in
both deposits from our customers and borrowings, which increased by $12.4
million and $10.0 million, respectively.
Deposits continue to be our primary funding source. During the three months
ended March 31, 2004, we had an increase in deposits from our customers of $12.4
million, from $272.9 million at December 31, 2003 to $285.3 million. This
increase occurred primarily within our demand deposit accounts, which increased
by $10.3 million during the quarter. Also during the current year quarter, our
borrowings, which consist almost entirely of advances from the Federal Home Loan
Bank, increased $10.0 million to $43.2 million.
Total shareholders' equity increased $1.6 million from $32.9 million at December
31, 2003 to $34.5 million at March 31, 2004. This increase in shareholders'
equity resulted principally from income from operations during the period of
$799,000, net proceeds from the exercise of stock options and employee stock
purchases in the amount of $685,000, and increases in other comprehensive income
in the amount of $403,000. Offsetting these increases were dividends paid to our
shareholders of $271,000. At March 31, 2004, both the Company and the Bank were
considered to be well capitalized, as such term is defined in applicable federal
regulations.
Results of Operations for the Three Months Ended
March 31, 2004 and 2003
Net Income. Net income for the three months ended March 31, 2004 was $799,000,
or $.30 basic per share, as compared with net income of $628,000 or $.23 basic
per share for the three months ended March 31, 2003, an increase of $171,000 or
$.07 per share. This increase resulted primarily from an increase in the
Company's net interest income for the three months ended March 31, 2004 of
$776,000 which was partially offset by increases of $225,000 and $244,000 in the
provision for loan losses and our non-interest expenses, respectively.
Net Interest Income. Like most financial institutions, the primary component of
earnings for the Bank is net interest income. Net interest income is the
difference between interest income, principally from loan and investment
securities portfolios, and interest expense, principally on customer deposits
and borrowings. Changes in net interest income result from changes in volume,
spread and margin. For this purpose, volume refers to the average dollar level
of interest-earning assets and interest-bearing liabilities, spread refers to
the difference between the average yield on interest-earning assets and the
average cost of interest-bearing liabilities and margin refers to net interest
income divided by average interest-earning assets. Margin is influenced by the
level and relative mix of interest-earning assets and interest-bearing
liabilities, as well as by levels of non-interest-bearing liabilities and
capital.
- 10 -
Net interest income for the three months ended March 31, 2004 was $3.7 million,
an increase of $776,000 compared to the first quarter of 2003, which resulted
primarily from the increase in the level of our average interest-earning assets
relative to the increase in the level of our average interest-bearing
liabilities during the quarter. Our average interest-earning assets increased
$36.8 million for the three months ended March 31, 2004 compared to the same
period in 2003, while during the same period, our average interest-bearing
liabilities increased $22.4 million, thereby resulting in an increase in level
of our net interest-earning assets during the current year period of $14.4
million. In addition, subsequent to the first quarter of 2003, the Bank entered
into an interest rate swap agreement that was used to hedge prime-based loans.
This interest rate swap increased interest income by $111,000 for the three
months ended March 31, 2004. Also, during the first quarter of 2004, the Bank
utilized interest rate swaps to hedge its exposure to changes in the interest
rates related to a $10.0 million notional amount of brokered deposits. This
interest rate swap decreased interest expense by $44,000 for the quarter. All of
the aforementioned factors combined to increase our net interest margin by 50
basis points from 4.06% in the 2003 quarter to 4.56% in the current year
quarter.
Provision for Loan Losses. The provision for loan losses was $568,000 and
$343,000 for the three months ended March 31, 2004 and 2003, respectively, an
increase of $225,000. This increase in the provision resulted largely from an
increase of $240,000 during the period as a result of an unsecured overdraft
related to a discontinued product. There was $133,000 of net loan charge-offs
during the three months ended March 31, 2004 compared to $243,000 of net
charge-offs in the first quarter of 2003. Non-performing loans aggregated
$972,000 at March 31, 2004, decreasing from the $1.1 million at December 31,
2003, while the allowance for loan losses, expressed as a percentage of gross
loans, was 1.33% and 1.25% at March 31, 2004 and December 31, 2003,
respectively. This increase in the allowance relative to our gross loans
resulted principally from the unsecured overdraft discussed above. Management
believes that the allowance is adequate to absorb probable losses inherent in
the loan portfolio.
Non-Interest Income. Non-interest income decreased $8,000 for the three months
ended March 31, 2004 to $908,000 as compared to $916,000 for the same period in
2003. There were no significant changes in any of the categories of income that
comprise our total non-interest income.
Non-Interest Expense. Non-interest expense increased $244,000 to $2.8 million
for the three months ended March 31, 2004 compared to $2.5 million for the three
months ended March 31, 2004. This increase was primarily due to an increase in
salaries and employee benefits of $178,000, which resulted from normal salary
adjustments, the addition of new personnel, and rising insurance costs. The
remaining non-interest expenses increased by $66,000 due to the Company's
overall asset growth.
Provision for Income Taxes. The Company's provision for income taxes, as a
percentage of income before income taxes, was 35.0% and 32.5% for the three
months ended March 31, 2004 and 2003, respectively.
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Liquidity and Capital Resources
Our liquidity position is primarily dependent upon the Bank's need to respond to
loan demand, the short-term demand for funds caused by withdrawals from deposit
accounts (other than time deposits) and the liquidity of its assets. The Bank's
primary liquidity sources include cash and amounts due from other banks, federal
funds sold, and U.S. Government Agency and other short-term investment
securities. In addition, the Bank has the ability to borrow funds from the
Federal Reserve Bank and the Federal Home Loan Bank of Atlanta and to purchase
federal funds from other financial institutions. Our management believes that
our liquidity sources are adequate to meet our operating needs and the operating
needs of the Bank for the next eighteen months. Total shareholders' equity was
$34.5 million or 9.4% of total assets at March 31, 2004 and $32.9 million or
9.6% of total assets at December 31, 2003.
Forward Looking Information
Information set forth in this Quarterly Report on Form 10-Q, under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains various "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which statements represent our
judgment concerning the future and are subject to risks and uncertainties that
could cause our actual operating results and financial position to differ
materially. Such forward looking statements can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof, or other variations thereof,
or comparable terminology.
We caution that any such forward looking statements are further qualified by
important factors that could cause our actual operating results to differ
materially from those in the forward looking statements, including, without
limitation, the effects of future economic conditions, governmental fiscal and
monetary policies, legislative and regulatory changes, the risks of changes in
interest rates on the level and composition of deposits, the effects of
competition from other financial institutions, the failure of assumptions
underlying the establishment of the allowance for loan losses, the low trading
volume of our common stock, other considerations described in connection with
specific forward looking statements and other cautionary elements specified in
our periodic filings with the Securities and Exchange Commission, including
without limitation, our Annual Report on Form 10-KSB, Quarterly Reports on Form
10-Q, and current Reports on Form 8-K.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
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Not applicable.
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Item 4 - Controls and Procedures
- --------------------------------
As required by paragraph (b) of Rule 13a-15 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), an evaluation was carried out
under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report, the
Company's disclosure controls and procedures are effective, in that they
provide reasonable assurances that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported, within the time periods
required by the Commission's rules and forms.
There have been no changes in the Company's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Description
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31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-4(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
On February 2, 2004, the Company filed a Form 8-K with the SEC
reporting fourth quarter and annual results for fiscal year ended
December 31, 2003.
- 13 -
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOUR OAKS FINCORP, INC.
Date: May 17, 2004 By: /s/ Ayden R. Lee, Jr.
---------------------------------
Ayden R. Lee, Jr.
President and Chief Executive Officer
Date: May 17, 2004 By: /s/ Nancy S. Wise
---------------------------------
Nancy S. Wise
Senior Vice President and
Chief Financial Officer
- 14 -
Exhibit Index
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Exhibit No. Description
- ----------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002